I’ve written a couple of times previously about Chesapeake Energy (CHK, Financial). My basic thinking is that if you think natural gas is going to go back to a $6 to $8 price range long term then CHK would make for an exceptional investment. Their acreage and reserve base is just enormous. Personally though, I have no confidence in an improvement in natural gas prices so I have been staying on the sidelines.
Here are my prior articles:
http://www.gurufocus.com/news.php?id=107630 http://www.gurufocus.com/news.php?id=100055
A friend of mine contacted me through my blog yesterday letting me know about a deal that CHK just announced. And it is a huge deal which raises over $1 billion of cash for the company in exchange for 5 years worth of production from CHK’s Barnett shale.
I have no problem selling forward production, but the fact that they are willing to lock in 5 years worth makes me a little uncomfortable for two reasons. One is that they are selling natural gas at very low prices which means that they aren’t anticipating an improvement. The other is that they are in need of cash.
A positive spin on this would be that they are seeing such great opportunities in their land grab of unconventional oil acreage that they think this is a good trade. These guys are without a doubt exceptional identifiers and acquirers of new plays. But that is just looking at this through rose colored glasses really.
Barron’s was out with a take on the deal as well:
“CHESAPEAKE ENERGY TODAY announced a five-year volumetric production payment (VPP) with Barclay's Bank, for $1.15 billion. The transaction covers 390 billion cubic feet (Bcf) of proved reserves in the Barnett Shale, which equates to $2.95 per thousand cubic feet (Mcf). This should not be a surprise to the market, since this is the eighth VPP deal in three years.
The short-term comparables are favorable, but the long-term outlook is bearish.
Two dollars and ninety-five cents per thousand cubic feet equivalent (Mcfe) is well above the implied year-to-date merger-and-acquisition transaction value of $2.28 per Mcfe for U.S. assets, and 75% above the $1.69 per Mcf for Barnett transactions. However, it is difficult to make comp since the gas delivered to Barclays is free of any operating cost.
Excluding operating costs, we value Chesapeake's (ticker: CHK) gas reserves at $2.25 per Mcf in our net asset value (NAV) estimate ($1.54 per Mcf net of cost). The value impact of the sale is a gain of $269 million, or 37 cents per share to our NAV estimate, which goes from $54.40 to $54.77.
Chesapeake has completed eight VPP transactions since year-end 2007, with this being the largest in terms of proceeds and reserves sold. However, it is also the lowest realized price for Chesapeake among the deals, which have averaged $5.77 per Mcf prior to today's announcement.
The fact that Chesapeake is locking in $2.95 per Mcf for the next five years seems like a very bearish view on gas prices. But these volumes only represent roughly 2.5% of proved reserves and the proceeds will help fund a 2010 capital program that is well in excess of cash flow.
Short-term pricing for the deal is favorable, but the fact that Chesapeake is willing to lock in sub-$3.00 prices to fund an oversized capital program reaffirms our view of the stock.
The past several years Chesapeake has collected $4.7 billion in proceeds from VPP transactions, nearly $11 billion in joint-venture deals, and roughly $5 billion in realized cash-hedging gains. Yet the company is still actively selling assets to support its budget.
We are concerned that Chesapeake's pursuit for unconventional oil assets will be a repeat of the factors that led to the stock's under-performance during its natural-gas land grab (high debt, rapid increase in shares, high finding cost). We reiterate our Neutral rating at this time.”
This is a very interesting company with a very interesting CEO. If only they could sell their natural gas for a better price this would be a no-brainer investment opportunity.
